How housing could rebound — in 2025

May 31, 2011, 7:49 PM UTC

Ready to be Depressed?

House prices have fallen further in the past five years than they did in the Great Depression – and there’s no sign the free fall is about to stop.

Downtrend resumes

The Case-Shiller index of U.S. national house prices fell again in the first quarter, S&P reported Tuesday.

The index is off 33% since it peaked in 2006. The peak-to-trough decline during the Great Depression, by contrast, was 31%, says Paul Dales of Capital Economics in Toronto.

That’s not the only eye-opener out of Tuesday’s Case-Shiller report. Real house prices, adjusted for inflation, are back at levels last seen in 1999, says Patrick Newport of IHS Global Insight.

Going by per capita income and disposable income per employee, housing is now 24% cheaper than usual, says Dales – making houses as big a bargain as they have been since Gerald Ford was stepping in White House garbage cans.

But don’t mistake those statistics for an argument that prices are likely to rise any time soon. While house prices are now on par with levels seen a decade ago, the economic outlook for the United States and most of its citizens looks a lot less optimistic now than it did in 1999.

Incomes have been falling as more workers are forced to compete with cheaper overseas labor, and the leverage that Americans used for years to fill a growing wage gap now looks like a decidedly mixed blessing. Massive debt and government belt tightening are likely to keep a lid on the economy for years, further limiting household gains.

And maybe the biggest shift is people’s view toward housing. After the stock bust of 2000-2001 many Americans noticed their houses kept appreciating and started viewing real estate as a winning asset class. But the collapse of the housing bubble means that thought is mostly history, which will limit the pool of willing buyers even with prices at striking low levels.

So how long till you get your head back above water on a house bought at the top of the market? Try 2025. In after the Depression-era housing bust, Dales writes, prices took 19 years to reclaim their previous peak. If you’re in the market for a greatly depressing thought, it’s a good one.